M&A in Ukraine: Can anyone beat banks?

By bne IntelliNewsFebruary 27, 2007

Dragon Capital in Kyiv -

M&A activity in Ukraine continued booming in 2006, with the estimated number of deals growing to 110 and their combined value reaching $5bn, most of this amount being inward flows from foreign strategic investors. The decrease in the total value of deals, from $7.7bn in 2005, is by no means a sign of the market cooling down, as more than 60% of the latter amount, or $4.8bn, was generated by a single transaction, the privatization of the countrys largest steelmaker, Kryvorizhstal, by Mittal Steel.

Deals in the financial sector, namely acquisitions of local banks by foreign strategic investors, commanded the lions share, or more than $3bn, of last years Ukrainian M&A transactions in value terms (please see the table below).

The sector is set for at another year of M&A activity, as Swedens Swedbank has just announced the acquisition of TAS-Komerzbank for $735m and at least two similar-sized banking deals are reportedly being negotiated. Foreign investors remain attracted by the Ukrainian banking sectors astounding growth (its total assets jumped by 59% last year, to $67.4bn, or 64% of GDP), and low penetration of banking services, especially in the retail segment (retail lending in Ukraine leapt by 137% in 2006, to $15.5bn). In addition, last year saw about a half-dozen M&A deals in the countrys burgeoning insurance industry, for about $130m collectively.

While financial sector M&A clearly dominated in 2006 and may as well remain on top in 2007, the sharp increase in the total number of transactions observed last year and a wider spectrum of industries involved demonstrate the markets strong growth potential for the coming years. Probably the largest among non-banking deals in 2006 was the acquisition of a 100% stake in private fixed-line telecom operator Optima Telecom, for an estimated $120m, by Ukraines largest business group, System Capital Management. The company was sold by another local group, Privat. Overall, according to Russian agency M&A Intelligence, telecom M&A, represented mostly by domestic consolidation deals, amounted to $190m in 2006.

Other M&A-active sectors last year were food processing (17 deals for $311m), metallurgy (6 deals for $298m), oil & gas (2 deals for $207m) and trade (8 deals for $167m), according to M&A Intelligence. The agency also estimated outward M&A deals in 2006 (acquisitions of foreign targets by Ukrainian companies) at just $105m, or 2% of the total value of deals.

This year may see the Ukrainian M&A market post a new record high if the government decides to proceed with the privatization of a controlling stake in the fixed-line monopoly Ukrtelecom and several other state-owned giants. Whats certain, Swedbanks acquisition of TAS-Komerzbank as well as the recent announcement of merger talks between local metallurgical giant Industrial Union of Donbas and Russian billionaire Alisher Usmanov Gazmetal holding seem to have got the market off to a good start in 2007.

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